Strangely, I have always felt a sort of affinity with Guaranteed Minimum Pensions (GMPs). Maybe it is because they were such an integral part of pensions at the point I started my career, and so we have matured together.
Now we potentially approach the beginning of the end for GMPs.
Currently it is all about the reconciliation process following the cessation of contracting out, but surely a next step will be to find a way to equalise and convert these to benefits.
At PASA we have published guidance to help administrators, trustees and scheme sponsors deal with the challenge of GMP reconciliation and we will shortly be publishing guidance on rectification.
When I first started working on the guidance, I thought reconciliation was the tricky part but I have reassessed that view and I think the greater difficulty lies in the rectification stage. This is where decisions become more difficult and the impact measurable - that might be in terms of liabilities, data cleansing and de-risking strategies, and, ultimately member benefits.
So, what is the key to getting rectification right? For me it is about getting all advisers and stakeholders working together and having the right data to inform the decision making process and using it to understand the impact on liabilities and members’ benefits.
They will need to make decisions that can be justified and that take into consideration other projects, past and future, in terms of precedent. All this has to be done in a cost effective way, for example - can the impact on liabilities be assessed based on the reconciliation data without the need for rectification calculations? Can this enable the decision about how to rectify over-payments to be made without individual calculations being required?
It is also about making pragmatic decisions, for instance where data is missing and benefit calculations cannot be recreated, and at all times ensuring there is compliance with legislation and best practice and that decisions and the rationale for those decisions documented.
At the end of the day however, it is all about the member and the benefits they receive. It is about ensuring that your rectification process takes into account their needs, especially if a pension is being overpaid and you have to decide whether to reduce the pension to the correct level, reclaim any over-payment or temporarily withhold pension increases.
Understanding the cost of each option has to be a determining factor.
Your members will not have had a lifelong love affair with GMPs like some of us have had and they may not even be aware of something that is potentially a significant component of their benefit entitlement. So, devoting time and resource to communicating to members whose GMPs change as part of your rectification process should form a vital part of your GMP planning.
Ultimately, love them or hate them, reconciling GMPs and the consequences of rectification is something we, as an industry, must deal with in a timely manner as part of what is potentially the end of a long term relationship.